“Do you like luxuries?” This was the startling question put to Andrew by his outside business consultant.
“Not really,” Andrew responded, defensively. “I’ve kind of gone through that phase of my life and am trying to be more down to earth in my tastes.”
“Well then,” wondered the consultant out loud, “Why are you spending so much of your company money on luxuries you don’t need and can’t afford.”
Andrew had called in the consultant because his company was in serious trouble. He was taking out a nice salary, but not a luxurious one. Sales were about the same as last year, but profits had turned to losses, and cash was drying up quickly.
“Like what?” Andrew asked, truly wanting to know.
The consultant proceeded to list about $90,000 of overhead that wasn’t really contributing to the bottom line, and that was potentially expendable. $90,000 a year would quickly right the corporate ship and create positive cash flow quickly.
How did the consultant find the culprits? He compared prior year financial information to the current year, paying close attention to every overhead item. It was quickly apparent that payroll overhead was up $40,000. This turned out to be two new positions that hadn’t existed in the prior year. The consultant didn’t even have to ask what these new hires did for the company. They hadn’t been necessary in the past with similar sales volumes, they had not helped sales go up or contributed to increased margins or decreased overhead in other categories. They were almost by definition, a luxury.
Next there were new expenses for trade shows. $15,000 represented a new show that the company had not participated in before that year. This was not as obvious a luxury. Did it bring in new business? Was it bringing in enough new business and/or clearly have the potential to bring new business that would justify the time, energy, and expense?
Each line item was also appraised to see if there were opportunities to reduce expenditures that had been in place for years. Were there new technologies, new suppliers, or new methods to achieve needed results with lower costs. One such opportunity showed up in the accounting department.
The company was large enough to justify a full-charge bookkeeper/IT person. This position oversaw clerks who input orders, handled purchase orders processing, etc. The position also maintained other aspects of the accounting.
This department had an assistant bookkeeper. This position was for payroll and creating month end statements, making tax deposits, and other similar tasks. The consultant suggested that this position could be outsourced to a company like ATPP who was far more efficient at these types of tasks. They would get better results for a fraction of the expense.
Finally, the consultant pointed to the inventory. The company was only turning its inventory 2X per year. In their industry, the norm was 4X per year. The cost of maintaining twice as much inventory as their competition was enormous. Those costs included rent, cost of funds, shrinkage, and insurance.
All of these issues could be seen from reading financial statements. A few hours of work resulted in saving the company $90,000 a year, and making them more efficient going forward.
If you would like to have your financial prepared quickly and accurately by an outside company at a very reasonable cost, please try ATPP. We have been helping businesses like yours since 2001. Call 818-436-2775.